The SEC Let Steven Cohen Off Easy

By Jonathan Weil -
Apr 4, 2013

The U.S. Securities and Exchange
Commission gets a lot of well-deserved brickbats for settling
cases with crooks and cheats without making them admit to
breaking the law. The deals often show the agency to be gutless
and weak. Other times they look plain stupid.

Here is one of those times when it’s all of the above. This
week, a federal judge in New York approved a $14 million
settlement between the SEC and a unit of Steven A. Cohen’s hedge
fund, SAC Capital Advisors LP, over insider-trading allegations.
Cohen’s firm neither admitted nor denied the SEC’s claims, which
was a ludicrous formality. The former SAC Capital analyst at the
heart of the case, Jon Horvath, already had been convicted
criminally. The violations he committed were central to the
SEC’s allegations against the $15 billion hedge fund.

Horvath, who worked at SAC’s Sigma Capital Management unit,
pleadedguilty to three felony counts last year, including
securities fraud. He is cooperating with the government while
awaiting sentencing. Had the SEC taken Cohen’s firm to trial,
the case should have been straightforward, at least on paper:
Simply call Horvath as a witness to describe his own crimes. “I
knew that what I was doing was wrong and illegal,” Horvath said
at his September plea hearing.

Feeding Colleagues

Horvath’s actions were imputed to the firm, as the SEC’s
settled complaint made clear. The inside information he fed his
SAC Capital colleagues about Dell Inc. and Nvidia Corp. let the
fund reap millions of dollars illegally.

SAC Capital’s chances of winning in court should have been
slim, although we never ought to underestimate the government’s
ability to mess up an airtight case. Instead of requiring
Cohen’s firm to acknowledge any violations, the SEC let it write
a check and move on. The U.S. district judge in the case, Harold Baer, approved the deal without a hearing.

The settlement was one of two last month between the SEC
and an arm of SAC Capital. The judge in the other case, Victor Marrero, is proving to be more than a rubber stamp. SAC
Capital’s CR Intrinsic Investors unit agreed to pay $602 million
to resolve allegations that it used inside information to trade
in two drug stocks: Elan Corp. and Wyeth. A co-defendant in that
case, former SAC Capital portfolio manager Mathew Martoma, was
indicted last year. He pleaded not guilty and hasn’t settled
with the SEC.

Marrero, in a hearing last week, questioned whether the
hedge fund should be allowed to avoid admitting that it did
anything wrong. “What if Mr. Martoma were convicted next week
or next month of the criminal charges against him?” Marrero
asked. “How would it look if, in this settlement, the parties
were allowed in essence to say ‘We did nothing wrong?’”

The two judges’ approaches make for a stark contrast. That
Horvath had pleaded guilty to crimes seems not to have mattered
at all to Judge Baer. Yet the possibility that Martoma might be
convicted greatly bothered Judge Marrero, who hasn’t ruled on
whether to approve the settlement. It’s a shame that Marrero
wasn’t assigned both cases.

The SEC tweaked its “no-admit” policy early last year.
Before 2012, a defendant could be found guilty of criminal
conduct and still include the usual “neither admit nor deny”
language when settling parallel SEC claims. The SEC no longer
allows this. Horvath, for example, acknowledged his prior guilty
pleas as part of a separate accord with the SEC last month.

Avoiding Admissions

Strictly speaking, letting SAC Capital keep the weasel-word
language is consistent with the new approach because prosecutors
didn’t charge the firm criminally. But surely when a hedge fund
makes a ton of money from an employee’s crimes, it’s wrong to
let it settle SEC fraud claims without confessing something.

Why let Cohen’s firm off the hook without admitting
anything? I asked an SEC spokesman, John Nester, for an
explanation. He responded by reiterating the SEC’s updated
policy.

An SAC Capital spokesman, Jonathan Gasthalter, said: “This
settlement is a substantial step toward resolving all
outstanding regulatory matters and allows the firm to move
forward with confidence.” He added that Cohen “has not been
charged with any wrongdoing and has done nothing wrong.”

No wonder Cohen has been on a shopping spree lately,
including a $60 million property in the Hamptons and a Pablo
Picasso painting for $155 million. He has good reason to be
pleased.

When the SEC unveiled its change in approach last year, the
enforcement director at the time, Robert Khuzami, said the new
policy “eliminates language that may be construed as
inconsistent with admissions or findings that have already been
made in the criminal cases.” That’s not what happened here. By
sticking to its “neither admit nor deny” boilerplate, the SEC
embraced language that’s at odds with Horvath’s guilty pleas.

There’s no denying this: The SEC let Cohen and his hedge
fund off easy.

(Jonathan Weil is a Bloomberg View columnist. The opinions
expressed are his own.)